Data breaches have become commonplace. Despite the best efforts of many, identity thieves and hackers always seem to find a new vulnerability somewhere in the system of virtually every company that conducts business online. And, as the recent Facebook debacle reveals, sometimes data is even shared with legitimate third parties in ways customers neither realized nor anticipated.
The Battle for Standing
Standing is a hotly contested battleground when a data breach spawns class action litigation. After all, we regularly give our credit cards to waiters and store clerks; we regularly publicize our email addresses in all sorts of unsecure ways; and much of our other personal information is readily available in one public forum or another. In all likelihood, after years of recurring data breaches, each of us has probably had our personal information exposed in more than one of these privacy incidents. So, why should the compromise of personally identifiable information absent misuse of that data traceable to a specific breach confer standing on anyone to sue any particular data breach defendant?
Courts have struggled with this issue over the years. On the one hand, Article III requires concrete actual injury or at least impending actual injury in order for a plaintiff to have standing to invoke federal jurisdiction. On the other hand, though, there is a growing concern in America that those who collect customer data should pay a price for not properly safeguarding it.
These tensions are reflected in a wide variety of standing decisions in the data breach context. Some courts (see decisions in Reilly v. Ceridian and Beck, et al. v. McDonald, et al.) have taken a dim view of the threat of future harm, i.e., an increased likelihood of future identity theft, as a proffered basis of Article III standing. Others (see decision in In re SuperValu, Inc. Customer Data Security Breach Litigation) have questioned the basis for standing where breaches only involve credit card information, but not enough information for bad actors to open new credit accounts. Still though, other courts have bent over backwards to find standing in the data breach context, arguing that time spent protecting oneself from a data breach (see Galaria/Hancox v. Nationwide Mut. Ins. Co.) or even the increased likelihood of data misuse (see Attias v. CareFirst, Inc.) is enough to confer Article III standing. Earlier this year, the Supreme Court declined to still the waters, denying CareFirst’s cert position challenging the D.C. Circuit’s conclusion that fear of future data misuse was enough to confer standing, despite clear circuit splits over that analysis.
So, the lower court disarray over standing continues to fester. In recent days, two more circuits have joined the side of class action plaintiffs in finding standing without data misuse.
The Ninth Circuit
The Ninth Circuit, in In re Zappos.com, found sufficient standing where plaintiffs’ allegations were based on an “increased risk of identity theft.” Early 2012, the servers of an online retailer were breached. During the breach, the personal information—names, account numbers, passwords, credit card information, etc.— of over 24 million customers was compromised. Several of the affected customers filed class actions, which were consolidated at the pretrial proceedings stage. Specifically, the plaintiffs involved with the recent ruling did not allege that they experienced any kind of financial loss from identity theft. Initially, the trial court dismissed the plaintiffs’ claim for lack of Article III standing. On appeal, the Ninth Circuit was tasked with deciding whether plaintiffs had standing based on the alleged risk of future harm.
Previously, the Ninth Circuit handled Article III standing of victims of data theft (see Krottner v. Starbucks Corp.). There, a laptop containing the personal information of almost 100,000 employees was stolen. Some of the affected employees sued, alleging that their harm was an “increased risk of future identity theft.” The Ninth Circuit held that the increased risk was enough to merit standing, finding that plaintiffs had “alleged a credible threat of real and immediate harm” due to the theft of the laptop containing their personally identifiable information.
In Zappos.com, the retailer asserted that the Supreme Court’s latest finding (see Clapper v. Amnesty International USA) meant that Krottner was inapplicable to the case at hand. The Clapper plaintiffs argued that for Article III standing, alleging that “there [was] an objectively reasonable likelihood that their communications [would] be acquired ‘at some point in the future.’” The Supreme Court ruled that “an objectively reasonable likelihood” of injury was insufficient where plaintiffs argument depended on a series of inferences that was “too speculative” to comprise a cognizable injury. In Krottner, unlike Clapper, no speculation was needed where the laptop thief already had all the information necessary to open accounts and cause financial harm to plaintiffs.
Accordingly, the Ninth Circuit, having decided that Krottner and Clapper were not irreconcilable, concluded that Krottner was applicable to the Zappos plaintiffs’ claims. The Zappos plaintiffs alleged both that the compromised information could be used to commit identity theft and that their credit card numbers had been breached, leading the Ninth Circuit to find that bad actors could immediately cause plaintiffs harm. The court also pointed to other plaintiffs within the case who had already suffered identity theft as a result of the breach. The court determined that the Zappos plaintiffs sufficiently alleged an injury in fact under Krottner.
The court assessed the remaining Article III requirements: whether the alleged risk of future harm is “fairly traceable” to the conduct challenged, and whether the injury will be redressed by the litigation. Relying on a case (see Remijas v. Neiman Marcus Group, LLC) where the Seventh Circuit ruled “[t]he fact that some other store might [also] have caused the plaintiffs’ private information to be exposed does nothing to negate the plaintiffs’ standing to sue” and their injury was nonetheless “fairly traceable” to the defendant’s data breach, the Ninth Circuit determined that even if plaintiffs suffered identity theft caused by data stolen in other breaches, those compromised would not negate their standing to sue in the case at hand. Further, the court found that the risk of identity theft was redressable by relief that could be obtained through this litigation and compensation through damages. Consequently, the Ninth Circuit reversed the trial court’s judgment as to plaintiffs’ standing and remanded the case for further consideration.
The Seventh Circuit
Similarly, the Seventh Circuit has reinstated a data breach class action filed against Barnes & Noble (see Dieffenbach v. Barnes & Noble, Inc.). The case was previously dismissed—three times— by the U.S. District Court for the Northern District of Illinois for lack of standing.
In 2012, “skimmers” breached the payment terminals in B&N stores, siphoning off customer information, e.g., names, payment card numbers, PINs, etc. Customer card information was stolen from terminals in over 60 B&N stores. Following the breach, plaintiffs filed a putative class action alleging (1) breach of implied contract (to secure payment card data); (2) violation of the Illinois Consumer Fraud & Deceptive Practices Act (ICFA); (3) violation of the California Security Breach Notification Act (DBNA); and (4) violation of the California Unfair Competition Act (UCA). In 2013, the district court first dismissed plaintiffs’ complaint without prejudice for lack of standing, ruling that plaintiffs failed to allege pecuniary harm.
In 2016, B&N submitted a motion to dismiss the amended complaint. Before the motion was submitted, however, the Seventh Circuit decided Remijas. Despite Remijas, the district court again dismissed the complaint, noting that while plaintiffs could merit standing based on the risk of future identity theft, plaintiffs still failed to allege “cognizable damages.” In 2017, the same district court, albeit a different judge, dismissed plaintiffs’ second amended complaint, finding that plaintiffs had not alleged any economic harm as a result of the breach.
The Seventh Circuit vacated the district court’s dismissal, finding that plaintiffs’ second amended complaint satisfied pleading standards relative to the injuries alleged from the breach. The court explained that alleging injury-in-fact for standing also meets the requirement of alleging a cognizable injury and entitlement to damages. Further, the court noted that “the federal rules [of civil procedure] do not require plaintiffs to identify items of loss (except for special damages).” Specifically, Federal Rule of Civil Procedure 8(a)(3) does not require plaintiffs to allege the details of their injury, and Rule 54(c) entitles plaintiffs to any legally available relief, regardless of whether the relief is pled in the complaint.
The court then looked to the injuries alleged by plaintiffs—loss of access to personal funds, time spent with law enforcement and banking representatives, deactivation of card, monthly charges for credit monitoring, etc.—determining that they were sufficient to meet the cognizable damages requirements under several of the plaintiffs’ claims.
It appears that a new trend is emerging at least in some of the more class-friendly circuits: finding standing in data breach class actions despite the absence of actual financial harm suffered by the plaintiffs. Likely, courts are attempting to respond to the proliferation of larger, more costly data breaches, as well as to a paradigmatic shift in sensitivity and senses of ownership over individual data. Regardless of the reasoning, it is evident that more and more plaintiffs’ counsel in data breach suits will bring their actions in these more favorable venues so as to be more assured of surviving standing inquiries. Businesses need to consider how best to prepare themselves for more vigorous, involved litigation in the data breach context. This includes planning for data breach litigation long before the data breach hits. Businesses should start by identifying and retaining knowledgeable, reliable outside data breach counsel, working with counsel to identify and retain reliable outside data breach response vendors, and doing all of that in coordination with their cyber liability insurance carriers. Those who lack cyber liability coverage should look into the coverage currently available, as this is more of a buyer’s market than it once was. Data breaches are interdisciplinary; they require a comprehensive team of legal, forensic, technological, and marketing professionals to fully and accurately assess, respond to, and ultimately remediate the damage done. Businesses cannot afford to wait until after a breach has occurred to assemble their response teams. The cost of procrastination is simply too high.